Taxing capitalists

The big talk in the UK this weekend (at least among those interested in such things) is the news that although Barclays Bank made £4.85bn (nearly $8bn) operating profit in 2009, it paid just £113m in taxes to the UK government, or an effective tax rate of 2.4%. This is against the official corporate tax rate of 28%, soon to be 24%, already low by international standards (Treasury minister David Gaulke, speaking to a business forum on tax competitiveness, recently boasted that Britain: “HAD THE LOWEST COMPANY TAX RATE OF ANY MAJOR WESTERN COUNTRY”).

Because Barclays is a global bank with many operations in all parts and 60% of its profits appear to originate abroad, it also paid tax to other governments. Under current tax rules in the UK, Barclays only has to pay any difference between the local tax abroad and the UK if the latter is higher. The fact that so little is paid indicates how low UK corporate tax is. So a bank that has its headquarters in the UK and uses London’s’ global financial facilities pays little or no tax in the UK. Even though 75% of its operations are derived from London, only 10% of its tax burden does. And the sick irony is that under new rules that the Tory-Liberal coalition is bringing in, this difference between local foreign tax and UK tax will no longer have to be paid. It would have meant that in 2009, Barclays would have paid no tax at all to the UK government!

The bank claims that it did pay tax in the UK to the tune of £2bn. But this was not corporate tax but payroll tax. In other words, it was what Barclays employees paid in tax and social security contributions that was collected by the employers and sent onto the tax department. It was employee taxes not a tax on profits of the shareholders. The shareholders paid just 6% of this £2bn.

Barclays’ tax situation is just one example of how large global corporations with many operations can switch their tax liability around the world to find the lowest tax burden through special companies set up in the so-called tax havens of Cayman Islands, Channel Islands, Luxembourg and secret jurisdictions like the City of London itself. Barclays has 30-plus of such ‘shell companies’ to avoid tax. There is a devastating new book by Nicholas Shaxson, Treasure Islands, tax havens and the men who stole the world, that exposes the workings of all these global tax avoidance schemes for the big corporations and how governments connive in it or allow it.

There are three ways that somebody (person or corporation) can get their tax down or pay none at all. They can lie about their earnings (tax evasion); they can employ batteries of accountants to come up with schemes that are designed for no other purpose but to avoid paying tax (tax avoidance); or they can simply refuse to pay (tax compliance). One of the most notorious cases of refusing to pay tax that is due under the law has been that of the global mobile telephone corporation, Vodafone. It owed the UK government under the current tax laws £6bn in taxes because it had salted away profits in a tax haven subsidiary (registered in Luxembourg ) purely to avoid paying UK taxes. The law was clear. The UK government pursued the company for the money but at the last minute, the leading UK tax official did a secret deal with Vodafone for the company to pay just £1.2bn, with £800m now and the rest over five years. The reason given for the deal when it was exposed was that it was a ‘good cash settlement’. But that’s only because Vodafone was fighting every inch of the way through the courts to avoid a settlement (although it was about to lose).

How many of us would get such a deal if we refused to pay tax due? Yet there are 190 similar disputes going on with UK companies who have put profits in tax havens to avoid paying. And these companies are now using the Vodafone precedent as a reason for refusing full payment. Far from pursuing this failure to pay tax under the law, the coalition government is offering new tax breaks. Companies with new patents for research will now get a large tax exemption. The Institute of Fiscal Studies says this “will lead to a large reduction in tax receipts and it is far from clear that any additional research in the UK will result from the tax break”.

According to the Tax Justice Network, around £25bn is lost through tax avoidance schemes in the UK, while up to another £70bn is lost through tax evasion by large companies and rich individuals. Also, because of the lack of tax staff, another £26bn goes uncollected. This £120bn would be more than enough to avoid the huge cuts in government spending and extra taxes on the average households being implemented by the coalition government in its current ‘fiscal austerity’ programme where they claim that we are ‘all in together’.

Of course, tax breaks for corporations and the rich along with tax increases for the average household and the poor are not confined to the UK. The latest ‘compromise’ budget deal between US president Obama and the Republican-controlled Congress raises payroll taxes for single workers on less than $20,000 a year or married couples with less than $40,000 a year (that’s 51m American taxpayers). Two-thirds of the poorest 20% of income earners had a tax increase of 1.3% on their cash income while only 1.8% of the top 1% of income earners got an increase (and they are earning over $564,000 a year). The best-off 1000 Americans got a tax cut of $45,000 each!

Apart from greed, there is a very good economic reason for a tax system that benefits corporations and the rich and hits the average family and the poor. In my last post, America: from progressive to rentier, I showed that an increasing share of profits in the US capitalist system is coming from overseas and from the financial sector. This has arisen as the pressure of a falling rate of profit under capitalism is countered by capitalists trying to increase the mass of profits through putting capital abroad or into financial returns from interest and rent and from fictitious profits on the stock market. Eventually, that led to a crisis of excessive credit (or fictitious capital), while starving investment in the productive sector. But these moves by capitalism can stave off the effects of falling profitability for some time, as we have seen.

Marx also raised another ‘counteracting influence’ to the falling rate of profit – just simply reducing taxes so that after-tax profits rise. Lowering corporate tax is a big part of that. Look at the trend in the effective tax rate on US corporations compared to the effective tax rate on their employees. The effective tax rate is a measure of what is actually paid compared to income rather than the headline tax rate. Whereas in the 1950s, US corporations paid an effective tax rate of around 40-45% of profits (without damaging profitability or economic growth then by the way) by the 1990s, that rate had fallen to 30-35%. In the last decade it dropped further to under 25% and reached an all-time low in 2009 at the depth of the Great Recession. The trend is clear: corporations are being taxed less and less to preserve their profitability. In contrast, the effective personal income tax on employees has remained pretty steady at about 35%. Less tax for capitalists and more tax for workers.

There are some compelling observations here. Countering the fall in the rate of profit by relying on foreign capital inflows (net capital inflows took off in earnest in the 1990s and peaked in 2008 just as the recession started at over $700 billion falling to negative over the following two years and recovering to around $500 billion in the first quarter of this year), lowering taxes (top bracket fell from 70% before 1981 to 35% currently) and, most importantly, pressing down on workers wages (which have seen little if any real growth since 1980) has altogether raised the total mass of corporate profits to an unprecedented $1.66 trillion which, as a share of the economy, is the highest its been since the 1920s or nearly 14% of GDP. Raising the capital intensiveness of production has also expanded the mass of profit by reducing the need for wage labor. Still the overall rate of profit has fallen dramatically since the 1960s when they peaked. Much of this can be attributed to what Marx called the “realization” problem for capital; this refers to capital’s inability to profit sufficiently due to constraints of effective demand caused by unemployment and falling real wages, both of which was intended to raise the rate of profit. This is capital’sore contradiction; marginalizing labor leads immediately to higher profits but has the long term, collective impact of lowering profits overall. Thus, did Marx proclaim that the key obsticle to the expansion of capital was capital itself.

Demand shock must be seen as the ultimate cause of capital’s falling rate of profit despite all the above mentioned mechanisms which have successfully boosted corporate profits temporarily. Another important factor which has sustained an essentially stagnant capitalist system is the growth of government spending (more and more of it borrowed money as the progressivity of the tax system disappears) as a share of the total economy. Currently, a good conservative estimate of the share of government spending at all levels in the US economy is about 40%. This is far higher than it ever was before 1980, despite the decrease in federal income taxes and the marked reduction of the role of government in the US economy!! The only thing that can possibly explain such a counter-intuitive development is the collapse of effective demand due to the destruction of the US middle class and the dramatic erosion of their once growing real incomes. Thus, the realization problem intensified and has been mitigated by increased household borrowing to meet expenses which has not only created a debt driven economy but has led to the financial instability which has become so apparent in recent years.

At the core of these developments is monopoly capital. The power of monopoly capital has destroyed working class power and has gained total unchallenged control of the US political system. According to one estimate the gross profits of the top 200 US corporations as a share of total US corporate profits went from about 13% in 1950 to about one third currently!! These corporations have shipped jobs overseas and forced unions into incredible givebacks in union negotiations making the overall gap between union and non-union wages the lowest in recent history! Fighting the power of monopoly capital and its political agenda will require a long term political struggle of the organized working class and a new political movement and agenda for a system based on human needs not profit.